SCOTUS GRANTS THE LOSS OF OVERSEAS PROFITS TO BE INCLUDED IN DAMAGES IN WESTERN GECO LLC V. ION GEOPHYSICAL CORPORATION

On June 22, 2018 in WesternGeco LLC v. Ion Geophysical Corporation, the Supreme Court held in a 7 – 2 decision written by Thomas J with Gorsuch and Breyer JJ dissenting that the loss of foreign profits resulting from the infringing export from the United States of a component especially made or adapted for use in a patented invention intending that component to be incorporated into the patented invention outside the United States, could be included in the damages award.

The patent in suit, owned by WesternGeco, related to a system for surveying the ocean floor. Ion Geophysical made components for a competing system and shipped them overseas where they were assembled into a system competing with WesternGeco’s. The Federal Circuit had affirmed a finding of infringement under 35 USC 271(f)(2) which provides:

Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

WesternGeco had claimed damages based on lost profits arising from foreign contracts that had been secured by the defendants only because of the defendant’s export of equipment from the United States. The district court awarded lost profits on this basis. The majority of the Federal Circuit, however, held that such lost profits were not recoverable as damages since awarding damages in such a case would be an impermissible extraterritorial extension of U.S. patent laws. The Supreme Court disagreed.

The Supreme Court reversed the Federal Circuit based on its reading of 35 USC 284 which provides that: “the court shall award the claimant damages adequate to compensate for the infringement.”

The Court noted a general presumption that federal laws apply only within the territorial jurisdiction of the United States. Ion Geophysical argued that since foreign conduct after the act of infringement was necessary to give rise to the injury, this presumption should apply in the present case. The Supreme Court disagreed.

Prior case law on the general question of extraterritorial application of U.S. laws requires a two step-analysis:

“whether the presumption [against extraterritorial application of the law]. . . has been rebutted.”

“whether the case involves a domestic application of the statute”, noting that Courts make the second determination by identifying “the statute’s ‘focus’ ” and then asking whether the conduct relevant to that focus occurred in United States territory.

In the present case, the Court focused on step 2, dismissing step 1 in the following terms:

While “it will usually be preferable” to begin with step one, courts have the discretion to begin at step two “in appropriate cases.”1 One reason to exercise that discretion is if addressing step one would require resolving “difficult questions” that do not change “the outcome of the case,” but could have far-reaching effects in future cases.2 That is true here.

On step 2, the Court noted: “If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application” of the statute, “even if other conduct occurred abroad.” 3

The Court noted that “the focus of §284, in a case involving infringement under §271(f)(2), is on the act of exporting components from the United States” … and “the conduct in this case that is relevant to that focus clearly occurred in the United States, as it was ION’s domestic act of sup¬plying the components that infringed WesternGeco’s patents.”

Consequently it followed that “the lost-profits damages that were awarded to WesternGeco were a domestic application of §284” and the presumption against extraterritorial application of United States laws was inapplicable in this case.

In his dissent, Gorsuch J was concerned that the decision:

would effectively allow U.S. patent owners to use American courts to extend their monopolies to foreign markets. That in turn would invite other countries to use their own patent laws and courts to assert control over our economy. Nothing in the terms of the Patent Act supports that result.

Gorsuch J’s dissent points out that the use on which the damage claim was based in this case did not infringe any U.S. patent because it took place abroad, beyond the reach of any U.S. patent. That analysis supports the position that the uses were noninfringing and therefore that damages should not be awarded.

The majority dismissed such concerns as “wrongly conflating legal injury with the damages arising from that injury.”

35 USC 271(f)(2) that was in issue in this case relates to situations where the acts taking place abroad are analogous to acts that would be regarded as contributory infringement if they took place in the United states. The decision specifically states that is does not address the position where the acts of infringement in question are actionable under 35 USC 271(f)(1) which is analogous to what would be considered active inducement of infringement if the acts in question took place in the United States.

Since 35 USC 271(f)(2) applies only to export of components that are “especially made or es¬pecially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use,” the impact of the decision may be less dramatic than at first appears. However, the possibility that its reasoning could be extended to situations under 35 USC 271(f)(1) where no such limitations apply may require pause for thought about the concerns raised by Justice Gorsuch in his dissent.